Adam N. Michel
House Republicans recently passed the first key legislative hurdle to modify and extend the 2017 Tax Cuts and Jobs Act (TCJA). The budget resolution allows a net $4.5 trillion tax cut, limiting the types of additional tax cuts Congress can include. Expanding the child tax credit (CTC) is likely one of the add-ons that will be curtailed.
Republican tax writer Blake Moore recently acknowledged that his almost $600 billion plan to expand and reform the child tax credit would likely not make the final cut. However, he remains hopeful that the credit will be “modernized.”
Republican proponents of family and child subsidies should focus on streamlining federal programs and leave any further expansions to states. This is not to recommend states create or expand welfare and other family subsidies—such policies tend to be wasteful and ineffective at any level of government—but leaving it to states to experiment would likely lead to less inefficient, more fiscally responsible, and more politically responsive policies than further federal expansion.
Child Tax Subsidies
The CTC is more than a simple family tax cut. The CTC is a direct spending program for the 24 million taxpayers with no income tax liability. These taxpayers benefit from the CTC’s “refundable tax credit.” In 2024, about 40 percent of the fiscal cost of the CTC is estimated to be direct spending instead of income tax cuts.
In 2017, the TCJA increased the CTC from $1,000 to $2,000 per child. This expansion was paired with eliminating the dependent exemptions, a $4,050 (for 2017) deduction for each household member, including children. The larger CTC for dependent exemption swap did not meaningfully increase the total fiscal cost of the tax code’s child subsidy. However, it shifted more of the subsidy to lower-income Americans, expanding the number of Americans who are net beneficiaries of the income tax system.
I’ve written, with Vanessa Brown Calder, about how the CTC is poorly targeted to meet most of its proponents’ policy goals, including boosting fertility, lowering costs, and fighting poverty. The tax code is not a well-tailored tool to address social policy goals.
Numerous similar tax provisions also subsidize families with kids. The earned income tax credit (EITC) offers a refundable tax credit to low-income workers, with the largest benefits going to households with kids. The tax code also includes a child and dependent care credit, a larger “head of household” standard deduction for single taxpayers with children, and employer tax subsidies for childcare and parental leave. Before further expanding any of these credits, they should be considered holistically.
Leave It to the States
States have increasingly taken the lead in implementing and expanding child and family subsidies. Most US states with income taxes have adopted versions of federal child tax subsidies, with many changing eligibility, refundability, and benefit amounts to better suit their citizens. For policymakers who favor additional child and family tax subsidies, this state-led approach allows for additional flexibility, innovation, and better resource targeting to meet the specific needs of families in different regions.
Of the 41 states and the District of Columbia with income taxes, 90 percent have implemented a state-level version of the CTC, EITC, or childcare tax subsidy. In 2024, 32 states had an additional EITC, 16 had a CTC, and 30 had a deduction or credit for childcare. Figure 1 shows the number of states by year with a state-level CTC or EITC.
The data indicate that state-level policy is responsive to political demands. Following the temporarily increased child credit during the pandemic, many policymakers and activists pushed for permanently larger credits. The federal credit was allowed to expire, but between 2019 and 2024, 12 new states added their own CTCs.
For policymakers who support these tax credits, the state-level momentum suggests that federal expansion is unnecessary and may even be counterproductive to state efforts. States are showing they can design and fund their own family and child subsidies.
Leaving welfare spending and tax subsidy programs to the states allows them to create better policies and expand accountability. As Cato’s Chris Edwards notes in a report on fiscal federalism, state budgets tend to be much more fiscally disciplined than the federal government.
Rather than continuing to increase federal tax credits, lawmakers should let states take the lead on social policy and focus instead on reducing federal tax rates and simplifying the federal tax code.
Federal Focus
The federal tax reform effort should focus on permanent reforms that keep tax rates as low as possible by repealing as many targeted tax credits, deductions, and exemptions as possible. The Cato Tax Plan cuts trillions of dollars of tax preferences, including the CTC and the EITC. With the savings, it lowers tax rates to near 100-year lows.
Expanding the CTC should not be pursued at the expense of other broader reform efforts. In a pre-election poll asking likely voters to rank their tax policy preferences among six options, like reducing tax rates on the middle class and raising taxes on the wealthy, voters listed “extending and expanding the Child Tax Credit” dead last.
To modernize the CTC, policymakers could consolidate existing family tax programs to create more streamlined benefits. The current list of credits—each with its unique income requirements, definitions of dependent child, and other peculiarities—includes the EITC, dependent care tax credit, head of household status, adoption tax credits, and business credits for family leave and childcare.
Any modernization effort should simplify and shrink—not expand—the total fiscal cost of federal child subsidies. Repealing these entirely in favor of lower tax rates would return social and welfare policy to the states where it can be more fiscally responsible and better designed.